MiFID II: No Longer Just for Europe
While a number of American firms have chosen to adhere to certain regulations laid out by MiFID II, it has not as of yet been implemented as law in the United States. Not only that, but some regulations put in place by the SEC actively contradict the European regulatory framework of MiFID II.
However, this could be liable to change in the near future. The SEC is facing increasing pressure from a number of US Asset Managers to change its regulations to more closely align to MiFID II. If these changes are implemented by the SEC, MiFID II would become the de facto global standard for financial regulation.
Of particular contention is the issue surrounding payment for research. A key tenet of MiFID II states that payment for research, trading and other services should be unbundled (i.e. charged separately). The intention of this is to lower the amount of money spent on research through more efficient allocation of funds. However, under the SEC, it is not required that payment for research be unbundled, leading to a clear discrepency.
Furthermore, under MiFID II, fund managers are not permitted to pay for research with commission. Instead, payment for research should be provided in hard currency. Conversely, however, the SEC states that fund managers pay commission, and that research should not be paid for with hard dollars.
These blatant and direct contradictions mean that American firms cannot at present fully adopt MiFID II’s financial regulatory standards.
However, now that MiFID II has been in effect for nearly 15 months, the benefits of the restrictions it places on research payment are beginning to make themselves known. According to the FCA, spending on research in the UK has dropped by upwards of 30%, saving investors in British equity funds roughly £180m. An optimistic estimation made by the FCA states that, over the course of 5 years, this figure could be as high as £1bn.
Many American asset managers claim that the SEC’s refusal to adopt a MiFID II-style regulatory framework is putting state-side investors at a disadvantage. This is particularly true when we consider that European investors operating within the United States are not bound by these same restrictive guidelines as domestic American firms.
In January of 2018, just as MiFID II was implemented across Europe, the SEC granted American firms a 30 month reprieve lasting until July 3rd, 2020. During this time, the SEC is willing to be somewhat lax with confusions surrounding transatlantic discrepancies with MiFID regulations. But with that deadline fast approaching, a hard and fast decision will need to be made before long. It may fall on senior buy-side managers to instigate a change: by providing the SEC with an assessment of their research use and the potential impact that unbundling may have on investors, the process of making MiFID II the American standard could be greatly expedited.